Geopoliticial tension subsided somewhat as Pakistani President Pervez Musharraf announced his resignation, averting impeachment, and Russian troops prepared to withdraw from parts of Georgia after signing an internationally-brokered ceasefire agreement.

More gloom lies ahead for banks as the financial crisis will probably not end until next year or even 2010, Germany's Handelsblatt newspaper quoted Morgan Stanley co-President Walid Chammah as saying in a preview of its Monday edition.

Financials were lower across the board, with Merrill Lynch and Lehman Brothers both off more than 3 percent.

Separately, Merrill Lynch continues to negotiate with Cuomo's office, which is seeking a fine of $100 million or more in its ARS case, in addition to repaying investors. Sources inside Merrill and Cuomo's office said progress is being made on a settlement.

General Motors was the biggest drag on the Dow after a weekend report in the Wall Street Journal that the auto maker plans to pull its longtime sponsorship of the 2009 Academy Awards. On Thursday, GM is expect to announce investment plans for an Ohio plant.

Home-improvement chain Lowe's reported earnings that beat Wall Street expectations. But the company lowered its full-year outlook and said sales at stores open at least a year fell.

Profit at the world's biggest miner BHP Billitonsurged 30 percentsurged 30 percent in the first half of the year on the back of strong demand from China. Cost controls and an emphasis on high-margin growth projects propelled its bottom line to a record profit of $15.4 billion for the full year to June 30, BHP Billiton said, but italso warned of weaker global economic growth in the short term.